As the worst performance year on record for funds of hedge funds draws to a close, hedge funds are also facing record withdrawals, according to Standard & Poor's Fund Services.
Hedge fund assets under management were down by 16 per cent in the third quarter to USD2.497tn, performance accounting for USD384bn of the reduction and investor redemptions for around USD128bn.
Most of the redemptions came from funds of hedge funds, the dominant investor in hedge funds, in response to withdrawals by their own investors, says Standard & Poor's Fund Services in its latest update on the sector.
Even so, S&P Fund Services found funds of hedge funds managers in a surprisingly upbeat mood.
'Despite record losses and withdrawals, many of the managers we have spoken to are more optimistic about the future than ever before,' said S&P Fund Services lead analyst Randal Goldsmith.
Goldsmith cited the example of the team at Theta, who said the current market environment offers outstanding opportunities for those who are able to stay or step in at this point.
In the short term, however, the team agrees with many of the managers whose hedge funds it holds that the end of forced selling in the markets has not yet come.
Charles Hovenden, manager of the Absolute Fund, said he was excited about the future, suggesting that in the heavily depressed convertible arbitrage segment there could be a 'once in a lifetime opportunity for survivors'.
He thinks next year should present some strong opportunities in convertible arbitrage, distressed and equity hedge, particularly in the US and Europe. He is expecting to build up holdings in distressed managers from around the middle of next year.
Benchmark Alternative Opportunities manager Karen Kisling thinks that once the current deleveraging has run its course there are significant opportunities in convertible arbitrage and long/short equity deep value. Kisling also believes that subprime, ABS and agency mortgage markets are attractive on a medium-term outlook.
A contrasting view came from David Smith, manager of GAM Diversity and head of the group's multi-manager team. He continues to hold a negative medium-term outlook for equities and remains positioned for continued difficult and volatile market conditions.